IRS Issues Guidance on Life Insurance Company Transition to 2017 CSO Mortality Tables

Given the release of the 2017 Commissioners’ Standard Ordinary (CSO) mortality and morbidity tables (2017 CSO tables) in late 2015, the IRS released Notice 2016-63 (the Notice), which provides guidance on transitioning to the new tables. The Notice modifies the guidance in Notice 2006-95 and assists taxpayers with interpreting the reasonable mortality charge requirement contained in §7702 of the Internal Revenue Code, Life Insurance contract defined.

Modifications to Notice 2006-95

  • Provides safe harbors regarding the use of the new 2017 CSO tables for purposes of §7702(c)(3)(B)(i).
  • Provides that if a benefit reduction or deletion is the only change to an existing contract, the change will not affect the contract issue date for the purpose of applying the applicable mortality table.
  • Provides that changes, modifications, or exercises of contractual provisions include reinstatement of a contract, as required under applicable state or foreign law.

§7702 provides that guideline premiums are determined on the basis of reasonable mortality charges that meet regulatory requirements and do not exceed the mortality charges specified in the prevailing commissioners’ standard tables as of the date the contract is issued. Section 807(d)(5)(A) defines “prevailing commissioners’ standard tables” as the most recent CSO tables prescribed by the National Association of Insurance Commissioners that are permitted to be used when the contract is issued.

The Notice provides a safe harbor that allows a three-year transition period during which the previous or newly issued CSO tables may be used. The following table summarizes which CSO table(s) may be used with respect to the calendar year that the contract is issued:

The Notice also specifies when changes, modifications, or exercises of contractual provisions require retesting under the 2001 or 2017 CSO mortality tables. Retesting is required if there is a(n):

  • addition or removal of a rider;
  • addition or removal of a qualified additional benefit;
  • increase or decrease in death benefit;
  • change in death benefit option;
  • reinstatement of a policy within 90 days after its lapse or as required under applicable state or foreign law;
  • reconsideration of ratings based on rated condition, lifestyle, or activity (such as smoker to nonsmoker status).

Retesting is not required if the:

  • change, modification, or exercise of a right to modify or add benefits is pursuant to the terms of the contract;
  • state in which the contract is issued does not require use of the 2001 or 2017 CSO tables;
  • contract continues upon the same policy form or blank.

As mentioned earlier, a reduction or deletion of benefits does not constitute a change to the issue date of the contract.

Notice 2016-63 became effective October 19, 2016. If you have questions on how the Notice impacts your organization, please contact us.

Johnson Lambert
Johnson Lambert | Author